What SMB Owners Need to Know About Raising Minimum Wage

By David Kiger | Small Business

What SMB Owners Need to Know About Raising Minimum Wage

Whether or not to raising the minimum wage was one of the most controversial issues of 2013. Whether you own a small screen-printing shop with two employees or a dozen restaurants with 500 employees, every entrepreneur needs to stay updated on this topic. If the federal minimum wage is raised to $10.10 per hour, SMB owners will be affected the most.

Pros of a Higher Minimum Wage

Many proponents of a higher minimum wage, including President Obama, argue that paying workers more will improve the standard of living, decrease employee turnover and stimulate the economy.

One of the strongest arguments for increasing the minimum wage is to improve poverty rates. An employee who works for 40 hours a week at the minimum required wage of $7.25 makes $15,080 annually. This is $50 below the national poverty line. The Bureau of Labor Statistics estimates 1.6 million Americans, or 2.1 percent of the workforce, make $7.25.

By paying workers more, some argue, businesses will be able to save money on training costs because employee turnover will decrease. Another possible outcome is that, as individuals receive larger paychecks, they will be more inclined to put the money back into the economy.

Raising the minimum wage could also help save the economy money spent on financial assistance. A 2012 University of California–Berkeley study found that more than half of fast-food workers receive about $7 billion in financial assistance collectively.

Some states and cities have taken it upon themselves to raise their minimum wage. Washington has the highest minimum wage for a state at $9.32, and the city of SeaTac made headlines earlier this year when it approved a $15 minimum wage. Washington, D.C., followed this lead when it approved an $11.50 minimum wage recently (it won’t go into effect until 2016).

Possible Consequences of Raising Minimum Wage

For as many positive outcomes as there are for increasing the minimum wage, there are just as many negatives, especially for SMB owners. Employers would have a larger financial burden, which could only be alleviated by raising product prices or cutting jobs. Certain types of employees, like teenagers, could also have a more difficult time finding a job as business owners shun less qualified candidates in favor of more experienced workers.

More than half (52 percent) of low-income workers are at businesses with 100 or fewer employees. If employers have to increase the amount they spend on payroll by nearly 40 percent, many say they will have to cut workers. Of course, this means the remaining employees would be expected to pick up the responsibilities from the vacated positions, giving them a larger workload.

This issue is similar to the one SMB owners faced when the Affordable Care Act regulations went into effect. Many employers cut hours or staff to avoid the law’s fines for non-compliance. Obviously that’s not an option here, but it stands to reason SMB owners would have to lighten their payroll in some way.

Keep in mind, of course, that the proposed increase doesn’t just affect workers making $7.25 an hour, but every employee that currently makes less than $10.10. SMB owners must start thinking of how they will address the increase if the bill passes.